Economic Modeling Of Point-To-Point Source Water Quality Trading In The Upper Passaic Watershed Accounting For Fixed And Variable Costs

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The lack of widespread success in existing water quality trading programs may be attributed, in part, to a limited correspondence between the institutional and hydrologic circumstances in "typical" watersheds and the open-market trading system envisioned in standard economics presentations of pollution trading. This thesis explores two aspects of the disparity between the theory and practice of water quality trading programs using modeling results from a case study of the Non-Tidal Passaic River Basin phosphorus emissions trading program. First, recognizing that hydrological systems and Total Maximum Daily Load (TMDL) objectives for a particular watershed may be quite complex, the Hung and Shaw (2005) Trading Ratio System (TRS) is broadly interpreted to enable firms to trade allowances upstream and across tributaries within a specified multi-zone management area. Specifically, the possibility of upstream and cross-tributary trading is investigated by modeling a "Management Area" (MA) policy proposed for the Upper -Passaic River Basin TMDL (Obrupta, Niazi, and Kardos, 2008). Second this study raises concern that the canonical theoretical presentation of tradable pollution allowances, in which firms buy and sell pollution allowances based on marginal abatement costs relative to the market determined price, is inappropriate for cost-effectively meeting a TMDL in a typical watershed. Such open-market exchange programs have been effective in settings, such as the U.S. Acid Rain Trading program that are characterized by large numbers of potential traders with heterogeneous abatement technologies across firms, and heterogeneous present capacity to meet standards. However this type of a trading mechanism is less amenable to point-source-to-point- source trading programs characterized by a small number of potential traders in a watershed, with discrete and homogeneous abatement technologies across firms, and most, if not all, firms not having the present capacity to meet the specified standard. In such settings, managers may be reluctant to not upgrade (and buy permits) or to develop excess treatment capacity (and sell permits) because of the relative lack of buyers and sellers in a thin market. Using the Non-Tidal Passaic River Basin phosphorus emissions trading program as a case study, I simulate trading scenarios under different market mechanisms. Based on the simulations of Marginal Cost Trading, cost savings accomplished under an open market mechanism range from 0.59% to 1.04% of total costs relative to the no-trade baseline. Given positive transactions costs, it is unlikely that a vibrant trading market would result in such circumstances, consistent with the disappointing level of water quality trading observed to date. On the other hand, the simulation results of Optimal Trading results suggest that if WWTPs are able to jointly optimize their capital investment levels, the costs savings can increase dramatically (up to 13.10% of the baseline total cost). This cost-saving potential leads to the argument that a structured bilateral trade system in which profitable trading opportunities are identified and implemented with multiyear contracts between firms, would more likely approximate cost-effective outcomes than an open-market, price directed system.

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Environmental Economics; Mixed Integer Nonlinear Programming; Water Quality Trading


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Poe, Gregory Lee

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Boisvert, Richard N

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Agricultural Economics

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M.S., Agricultural Economics

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Master of Science

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dissertation or thesis

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